2030

Last week I did a talk entitled ‘2030’ – a topical title these days given the cloudy outlook and there are already some decent books such as Jim Stavridis’ ‘2034’ that look out that far. Yet, the fallacy of forecasting is to try to imagine discrete events in the future – a better starting point in looking ahead eight years is to go back eight.

If we travel back to 2014, the key events were Russia invading Crimea, Britain’s existential political struggle (Scottish independence), an epidemic (Ebola in Africa), pro-democracy protests in Hong Kong, an economic crisis in Europe, the election of Modi in India and Iranian nuclear talks. Many of these phenomena are still with us (Modi, Iran), others ‘we’ failed to take seriously as portending more serious developments (Russia, Brexit, Epidemic, HK). In particular, the last four have stress tested globalization and found it wanting each time.

If, based on the comparison of 2014 to today, we extrapolate a trend in the behaviour of nations then we might hazard that by 2030 Russia and China will form a lonely anti-Western alliance, Emmanuel Macron will be President of the EU, Hungary will be been forced out of the EU replaced by Scotland, several international conflicts have been caused by food and water shortages, despite massive advances in healthcare technologies.

Alternatively, a contrarian or controversialist view might see Russia applying to join the EU, the UK becoming the Singapore of Europe, Japan quickly building a nuclear weapons program and a metaverse driven mental health epidemic.

That demand for ‘2030’ vision is high, is attributable to the end of globalization and the opening up of uncertainty over issues like geopolitics and more recently monetary policy and financial markets.

As we stressed in last week’s note, I believe we are now into a phase called ‘The Interregnum’, one where the old order is being broken down and slowly new structures will be built up. My endpoint is a multipolar world of large regions who ‘do things’ differently. How well formed this will be by 2030 is hard to tell.

There are a few tectonic shifts that I would like to highlight, the first of which relates to geography.

Going back to Paul Krugman’s early work on geography and trade, the great triumph of globalization is that it undercut geography in the sense that industrial production and even less so trade, were tied to geography. Tom Friedman’s ‘The Earth is Flat’ was a schmaltzy celebration of this.

In the next eight years and beyond, geography will again be undercut by the notion of ‘values’ or ways of doing things. The European Union is driven by a values based approach to its community (much of which is lost on its 500 million citizens), based around social democracy. As an example, Hungary is an EU member but its leadership and electorate increasingly express a very different set of values, which is why I consider it may not be an EU member by 2020. In contrast, the British value system is consistent with that of the EU, which is why Scotland would relatively easily be a member and England can continue to cooperate closely with the EU on international affairs.

A values based approach to politics and diplomacy is quite different to the idea of alliances that have historically bound nations because values are deeply rooted in the culture of regions and the behaviour of their citizens. In that respect however, Europe is the least interesting of the regions.

In the USA, whether people realize it or not, there is a grand contest ongoing over values, the latest battle ground of which is Roe v. Wade, and across Asia countries like the Philippines and Thailand on one side and Japan and Taiwan will interrogate their value systems relative to the role of China in Asia, the stresses on both autocratic and democratic models of governance and socio-economic topics like immigration.

One of the most pertinent indicators of ‘value’ based approaches is the treatment of women and the LGBT communities. There is a very strong correlation between these factors and other important markers such as the quality of democracy, innovation, quality of life and human development variables. Small advanced economies are a great example.

In economics, I have already speculated that the very long business cycles of the past thirty years will likely be replaced by shorter boom-bust cycles, not least because there will be less synchronicity between the large economic regions.

Another major, likely change with 2030 in view will be the transition of corporate business models from the ‘globalised’ one (where different functions could be dispersed around the world) to one where there is more of a focus on the vertical industry chain – a process that is dominated by two factors, a community of users or clients (think of fintech or health tech) and a skeleton of very efficient technology that links them with services.

I want to finish this week’s note by returning to 2014, and offer a final thought to scare you on a Sunday morning. Many of the crises of our day were prefigured in 2014. The one recurring danger that is manifest across the world is climate damage – parts of east Africa have not seen rain in two years, India is experiencing brutal heat. In this respect I think the extent of climate damage and the policy reaction to it will be the swing factor that determines what 2030 looks like. 

Have a great week ahead,

Mike

Victory Day?

One of the curious accoutrements of the Kremlin are the very large benches that sit just outside it, almost too big for comfort such that the first time I passed them I imagined giant Cossacks resting themselves as they visited the capital. What those giant Cossacks might make of today’s Russian army would be interesting to know, especially with Monday’s ‘Victory Day’ military display in and around the Kremlin.

It is expected that the Russian President will use the occasion to formally declare war on Ukraine and call up a full mobilisation of troops (especially conscripts). Such a move will deepen the conflict around the invasion of Ukraine, may result in the use of heavier and more deadly armaments and further entangle Ukraine in a proxy war.

Of course, another avenue open to Vladimir Putin may be to use Victory Day to engage in some much needed risk management, and to declare a ‘mission accomplished’ in the context of a much degraded Russian army. If he did so, it would be in keeping with the current macro climate where in the context of the unravelling of monetary policy and the business cycle, ‘strategy’ has given way to risk control.

While Vladimir Putin and the Nasdaq don’t ordinarily have much in common, this week’s pronounced volatility in the financial markets (an assortment of some of the biggest daily moves in over 50 years), and Mr Putin’s behaviour, together signal that we are at the end of an era – that was marked in particular by peace and by the benevolence of central banks.

In many ways as we leave globalization behind, we are unwinding its many positives, and those who puzzle the fact that there are so many ‘events’ should step back and consider the very big picture which is that economic, geopolitical and financial cycles have left the ‘globalization phase’ and entered what I have called ‘the Interregnum’.

The Interregnum is not a well defined phase, but rather involves the breaking down of established things (from political parties in France, to the WTO, and more recently apparently  Roe/Wade to give a few examples) whilst more optimistically building up ‘new things’ (the digital economy, better healthcare, a more robust EU).

My suspicion is that from an economics point of view, one of the key factors that will define the ‘Interregnum’ with respect to ‘globalization’ is that we will have much shorter business cycles, certainly compared to the two very long ones that characterised globalization (i.e. ‘92-‘01, ’11-’20) as the effects of QE, indebtedness, questionable productivity rates and digitisation all unfold. This will necessarily make financial markets more interesting.

If this is the case it will make life more difficult for companies at large, for real estate in particular and at a guess may mean that more capital flows to companies operating in areas defined by new technologies and innovations (healthcare in particular) and that are part of secular trends (the ‘building up’ part of the Interregnum). Here it is important to state that companies that rely on leverage and that masquerade as innovators, will find life difficult.

Another emerging challenge, if we are to enter a period of shorter business cycles, is how to organise institutions, companies and the process of innovation. Digitization and the growth of the venture capital industry means that new enterprises can start and grow very quickly (TikTok is the example many think of). Adaptability will be another criteria and here there is a growing focus on how the Ukrainian army has organised itself in a much more flexible way compared to the Russian one, and how this particular case study reinforces the idea of decentralised, dynamic organisational models.

This neatly brings me back to Mr Putin, and makes the point that in the 21st century institutional quality, freedom of thinking and human development will continue to be important determinants of country success. He has neglected all three.

As such, I would like Mr Putin to act as the risk manager rather than grand strategist or evil dictator on Monday, but I worry that the risk of a tail military event (isolated strike into Poland or against a Scandinavian/Baltic state) is still too high.

Have a great week ahead

Mike